Business | Economy

The business of making business easier

While the Gulf is generally associated with its windfall, resource-based liquidity surplus, of particular relevance to the capital-starved world economy of today, it can still do with attracting foreign investment for its own development. Mr Fahad Al Ibrahim, Director-General of The Arab Investment & Export Credit Guarantee Corporation (Dhaman), tells Financial Review how his organization facilitates that requirement

Interview by Andrew Shouler, Editor, Financial Review

Published: 00:00 November 27, 2011

Image Credit: Asghar Khan/Gulf News

Dhaman was established in 1974 with its headquarters in Kuwait, as an autonomous Arab regional organization encompassing in its membership all Arab states, and a number of Arab international organizations. Its key interest is to promote the business environment of the Arab countries.

What have been the highlights for Dhaman during its history since its formation; and the organization's main achievements?

Dhaman's objectives are:

- To provide insurance coverage against non-commercial risks for inter-Arab and foreign investments (such as expropriation, war, the inability to transfer and/or breach of contract) in development projects in the Arab countries, and guarantees against non-commercial risks for portfolio investments in Arab countries, whether in the form of shares, instruments or bonds;

- To provide insurance against commercial and non-commercial risks for inter-Arab and worldwide Arab export credits (i.e. in relation to non-receipt of the value of exports from the importer at the date of maturity), as well as guarantees against commercial and non-commercial risks for financial and operational leasing and issuing letters of credit;

- To raise awareness of investments in Arab countries by means of a group of complementary activities and ancillary services, aiming to enhance the business environment and investment climate, identifying available investment opportunities, and developing human capital.

Dhaman provides advice to its member states and clients through its publications, periodicals, and most importantly the annual report "Investment Climate in Arab Countries" and quarterly bulletin "Dhaman Al Istithmar". We also produce follow-up reports on the important investment decisions of international institutions, particularly those on sovereign ratings (and advise countries on how to improve them). Dhaman has long experience, and one of the highest credit ratings as a counterparty as well as financial strength rating as an insurer.

As it continues to develop and deliver its services and encourage and facilitate flows of Arab and non-Arab investments to Arab countries, these efforts can be reflected in a cumulative total value of guarantee contracts of $6.4 billion, of which $1.2 billion were during the year 2010.

You produce periodic reports monitoring the investment climate across the Arab region. Please summarize the latest situation in the wake of the prolonged global financial crisis, and the ongoing political and social movements in the Arab region.

Arab countries have continued to apply reforms to strengthen and liberalize the region's economies, in order to make them more attractive to foreign capital. Rapid growth has attracted and been facilitated by FDI flows, which have increased substantially in recent decades.

Global FDI has yet to fully recover from the crisis and reach its pre-crisis levels. According to the latest data, FDI inflows to the Arab countries (21 countries) declined by 13 per cent to reach $66 billion in 2010 compared with $76 billion in 2009. During the period 1999-2004 Arab countries' FDI [attained] an annual average of $11 billion. In the next five years, 2005-2010, it witnessed unprecedented growth, reaching a record high of $439 billion and an annual average of $73 billion. It is still too early to be able to measure the impact of the political and social events among Arab countries in 2011 upon FDI. Dhaman has categorized the impacts into three separate timeframes: short-term, medium-term and long-term.

In the short term, from the official preliminary indicators we can conclude that these events have had a negative impact on FDI flows, especially in the countries where these events actually took place. However, as for the medium term and long term, Dhaman expects that in most cases the situation will be a positive one, especially if there are implementations of essential reforms from the standpoint of the investor in the political, economic, social and institutional environments. We expect an increase in current expenditure and investment in the Arab countries, as well as more regional and international aid.

Despite the high degree of uncertainty at present, FDI inflows to the region are likely to decline during 2011 in the Arab region, which Dhaman expects to be around $50-55 billion.

Yet, many international companies still look to invest, especially in stable oil-exporting countries, mainly the GCC. The region has a wealth of oil worth an estimated $40 trillion, more than the market capitalization of all the listed companies in global markets combined.

What overall trends do you identify now in terms of FDI? To what extent is there a need for foreign investment into the Gulf region especially, considering its general financial surplus but also perhaps its requirements still in terms of practical/technical know-how?

It is known that FDI is a crucial factor for economic growth, and vice versa. Many studies have highlighted the positive effects of FDI, especially with respect to its stability advantages on other types of capital flows, the know-how transfers which often accompany such investments, upgrading infrastructure and labour skills.

The potential benefits of FDI extend far beyond the financial resources, but costs may be entailed as well. Governments throughout the region have been striving to find an appropriate policy mix. Consequently, there is considerable variation across countries, reflecting differing economic, social and political conditions.

FDI inflows in the GCC in 1990 recorded $166 million (13 per cent of total Arab FDI inflows), reaching approximately $40 billion in 2010 (60 per cent of total Arab FDI inflows). The main trend we are seeing nowadays is the large increase in FDI inflows to developing and transitional economies. A major part of this is due to ‘south-south' cooperation; also noticeable developments in inter-Arab investments within the past few years. We can see these trends clearly if we look at them sectorally. For example, investments in the agricultural sector have been witnessing continuous increases lately in the region, as an outcome of rising food prices (which has always been one of the main reasons for political and economical instability and social unrest throughout history).

The agriculture sector plays a vital role, but has not been fully utilized. It still has a lot of potential if it is approached in an effective manner with the aim of creating an integrated Arab agricultural policy. The Arab region is blessed with tremendous resources, both natural and human, and if they are put to use in a well-organized and resourceful manner, this sector could attract much more FDI inflows, both Arab and global in origin.

There has been a continuous increase in the role played by the retail sector in the region, especially in terms of inter-Arab investment. [Similarly] the telecommunications sector, whose significance is expected to grow further with major investment moves by the [likes of] Zain, Saudi Telecom, Etisalat, Orascom, Qtel, Batelco and others. The growing tourism sector has been noticeable, especially upon large investments from the GCC countries in the Levant and the Maghreb regions and in Egypt in particular.

What are the current, most outstanding investment opportunities you perceive among the Arab countries, and how is Dhaman involved in their discovery and development?

Dhaman monitors investment opportunities, then studies them and categorizes them geographically and sectorally. For 2010 Dhaman identified 2,194 investment opportunities in 19 Arab countries, with an accumulated value of $885 billion. [We] also shed light on large investment project plans carried out by governments in the region, giving the private sector growing opportunities to participate. Dhaman also assists in the e-marketing of such opportunities, as displayed on the website. It also organizes or participates in organizing many events and conferences aimed at promoting the region.

Dhaman recently participated in the Inter-Arab Investment Conference in Cairo, Egypt. What were the main findings?

Inter-Arab FDI inflows have more than doubled during 2005-2010, reaching a record high of $138 billion, at an annual average of $23 billion, approximately six times the total of 1999-2004. In order to increase inter-Arab investments, Dhaman proposes the reduction of FDI restrictions and providing a more welcoming investment climate, as well as the elimination of most tariffs amongst all Arab countries.

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Business environment rankings

Dhaman created a database to monitor the ‘doing business' environment in Arab countries, available on our website, focusing on the main index and ten indicators, monitoring each indicator through statistical tables, and the development of all sub-indices.

This report measures the development of approximately 45 components for 19 Arab countries, and the reforms that have been made. There is no doubting the interest of many Arab governments to follow their rankings, and even form specialized committees to achieve these reforms. These efforts have also given an incentive to the other Arab countries to do the same.

There was an acceleration of the pace of reforms by the governments in the region during 2008-2011. As a result the business environment has become easier, and most Arab countries have witnessed improvements in their rankings, despite the recent decline as a result of political developments.

Arab countries have also managed to improve the quality of their economic statistics, to match international standards. These improvements are reflected in the leap of FDI inflows to the region, as well as of inter-Arab FDI flows. Still, the share of total FDI inflows to Arab countries as a percentage of the world total still remains very low, approximately 5 per cent.

We have still not reached our full potential, and many challenges still exist, most notably the following, linked to: (a) political factors; (b) economic and financial factors, as a result of the continued dominance of the public sector; (c) structural factors, i.e. infrastructure; (d) legislative associated factors; (e) organizational, administrative and procedural constraints; (f) the availability of qualified human resources; (g) the lack of availability of information.